U.S. Equity Markets were bid on Friday with the S&P 500 briefly rising above 6000 before paring into the closing bell. The NASDAQ 100 was the relative underperformer with Tech and communication among the lagging sectors, with only materials also closing in the red. Outperformers were led by Utilities, Real Estate and Consumer Staples. It was primarily post-election Trade as participants continued to react to the Trump win. T-notes continued to flatten after the steepening seen on Trump’s victory, although the Dollar resumed to the upside on Friday after weakness on Thursday. Crude prices were sold throughout the session on a disappointing China stimulus update with a lack of demand measures disappointing investors. In FX, the Japanese Yen outperformed as longer-dated US Treasury yields fell while both the Australian and NZ Dollar lagged on the disappointing China update. There was little data released on Friday but the University of Michigan Consumer Sentiment survey did beat on the headline sentiment, but current conditions fell slightly, but this was more than offset by a jump in forward-looking expectations. Meanwhile, inflation expectations eased to 2.6% from 2.7% in the 1yr but 5yr forecasts rose to 3.1% from 3.0%. Attention this week turns to US CPI and Retail Sales data. The Federal Reserve cut rates by 25bps to 4.50-4.75% last Thursday, in line with market pricing and analyst expectations, and also in a unanimous decision. The statement saw some changes, it removed language that it “has gained greater confidence that inflation is moving sustainably toward 2 percent”. It also adjusted its explanation of why the Fed cut rates, to “in support of its goals, as opposed to “in light of the progress on inflation and the balance of risks”. Fed Chair Powell confirmed in the press conference these changes are not meant to send a signal on policy, but the language beforehand was a test for when the Fed cut rates, but now they have started to ease policy, that test is no longer needed. The statement changes further confirm the Fed’s commitment that they are focused on both sides of the Fed’s mandate, as opposed to just inflation. The Fed maintained language that risks to both sides of the mandate are “roughly in balance” and it still describes inflation as “somewhat elevated” and acknowledged that labour market conditions have generally eased. Fed Chair Powell noted the economy is strong, labour market remains solid, and that inflation has eased substantially. He also kept his options open again, noting they can move more quickly or they can move more slowly, depending on how the economy reacts. Powell believes the Fed is on the “middle path”, noting they have to be careful not to move too quickly, or too slowly. But they will be careful to increase the probability they get the easing process right. When asked about the statement changes, he stressed this was not meant to send a signal, it was just appropriate to adjust language as now the Fed has started the easing process. He spoke strongly on recent data, stating economic activity has been stronger and some downside risks have diminished. On the recent inflation data, he said it was not terrible but it was higher than expected. The Fed Chair was also asked about the recent movement in yields post the Trump victory, he said it is too early to say where bond rates settle, noting financial conditions only tighten when rates are high for long, and they are not yet at the stage where bond rates need to be taken into policy consideration. He noted that bond rates reflect growing growth expectations and not about higher inflation expectations. Meanwhile, as expected, the Bank of England Monetary Committee opted to lower the Bank Rate by 25bps to 4.75%. The decision to do so was made via an 8-1 vote split with arch-hawk Mann the lone dissenter in voting for an unchanged rate. Within the policy statement, the MPC reiterated that it “will ensure Bank Rate is restrictive for sufficiently long until the risks to inflation returning sustainably to 2% target have dissipated further”. Furthermore, it was noted that a gradual approach to removing policy restraint remains appropriate and Governor Bailey remarked that the MPC cannot cut rates too quickly or by too much. The accompanying MPR saw an upgrade to 2025 and 2026 inflation forecasts with the BoE noting that the UK budget is “provisionally expected to boost inflation by just under 0.5ppts at peak between mid-2026 and early 2027”. That being said, ING cautions that there is a big caveat to the forecasts. This being, “that the Bank hasn’t accounted for the market reaction to the latest budget in its new forecasts”. If they had, the upgrades to inflation and growth forecasts would have been more modest. At the follow-up press conference, when questioned on the impact of the UK budget on monetary policy, Governor Bailey remarked that the MPC needs to see how it will impact inflation, however, he does not think that the path of rates will be different to what it would have been otherwise. On the rate path, Bailey refused to provide specifics regarding what “gradual” means when it comes to lowering rates. However, he did note that if progress on inflation continues, the MPC will respond to it. Note, Bailey refrained from providing a view on the potential impact of expectations of tariffs from the incoming Trump government. Overall, the market has judged that the latest UK budget has forced the MPC to adopt a relatively hawkish stance compared to its peers. Accordingly, odds of a December cut sit at just 20% with a total of 65bps of cuts seen by end-2025. Elsewhere, Oil closed 2.61% lower, while despite a stronger Dollar, Gold ended Friday with a gain of 1%.
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